In launching a new information system, the greatest risk occurs when a company

Traditional thinking, on supply chain risk management, like this article by Deloitte consulting, focus on procurement and sourcing strategies. A focus on traditional risk management misses the mark in these unprecedented times of demand and supply variability.

Let’s start the discussion with a definition. The Wikipedia definition of supply chain risk management is "the implementation of strategies to manage both everyday and exceptional risks along the supply chain based on continuous risk assessment with the objective of reducing vulnerability and ensuring continuity". However, as we move into 2023, and face the risks ahead, more holistic thinking is required. Here we ask, “Why only focus on supply? Why are other areas not being evaluated?” Here we share perspective on other risks facing business leaders, and not in focus for the majority of companies, at the start of 2023.

Sydney Harbour, the Harbour Bridge the Opera House and surrounding buildings in early morning fog. ... [+] Sydney, Australia. Tuesday May 28th 2013. Photo:( Steve Christo). (Photo by Steve Christo/Corbis via Getty Images)

Accepted practices outside of the focus of traditional supply chain risk management are the largest risk to the corporation. This includes the management of demand-side (commercial operations) strategies, the alignment/design of flows for product portfolios, talent turnover with aging technology infrastructure and the impacts of shifts in climate. To mitigate risk, look holistically at how to reduce variability and improve continuity. Look past the current focus of traditional supply chain risk management with a focus only at procurement and supplier management practices.

Risk Headwinds

Here we share risk factors to consider in the evolution and evaluation of 2023 strategies.

Demand-side Risk Factors:

1. Unabated Complexity. Over the last decade, companies perpetuated a myth that product personalization and item proliferation were a necessary part of doing business. Complexity is like cholesterol: good complexity adds profit and growth while building market share while bad complexity drags profitability without a contribution to growth. Today, only 2% of companies evaluate the tie between product proliferation and market share growth. The elongation of the supply chain product portfolio requires a redesign of the supply chain. Yet, only 9% of manufacturers actively design their supply chains. Unabated growth in product complexity without platform rationalization, recipe/ingredient standardization, and product complexity analysis is a ticket to bankruptcy in this uncertain environment.
2. Demand Shifting. Companies wanting to grow deploy demand shaping activities—price, promotion, advertising, in-store merchandising, and new product launch. The problem is that only 50% of activities are evaluated and the cycle for analysis takes four-to-six weeks. When evaluated, companies find that over 60% of activities shift demand increasing cost without improving market potential. The recommendation is to simplify demand shaping activities in the face of turbulent demand and use newer forms of analytics and consumption data to measure effectiveness weekly. (If you are in consumer products, this means abandoning the dependency on syndicated data and traditional technology approaches.)
3. China. Economics. Covid. The Covid story in China for 2023 is unknown, but buckle your seatbelt. If China is an important market, expect wild swings with illness, market shifts and policy. Start to predict demand based on market factors and abandon the historic market patterns as a reliable source of demand. If China is a major source of supply expect major disruptions and start to move operations to a more stable base of manufacturing.

Climate

1. Water. The redefinition of the world’s water resources on the planet with climate shifts is a major risk to the supply chain. Barge traffic up and down major rivers may not be possible, and manufacturing sites requiring large quantities of water may require relocation. Look at the impact of the shifts of water on the planet closely in your supply chain strategy, and in the process, think hard on how to be a good steward of the planet’s resources.
2. Landfill. We are raping the planet to manufacture the wrong inventories. Reduce waste by investing in the building outside-in processes to synchronize planning processes from the channel to the supplier to sense and translate demand. This requires the redefinition of planning taxonomies. Evaluate inventory health monthly and continually design the supply chain to focus on right form and function of inventory.

Talent

1. Talent Turnover. We are saying good-bye to first and second-generation pioneers. Supply chain process evolution began in the early 1980s. With the generational shifts, first and second-generation pioneers are retiring. The problem? In many areas of the corporation like Electric Data Interchange (EDI), Vendor Managed Inventory (VMI) and network management, the processes operate largely on tribal knowledge. The action item is to audit to understand vulnerability for older technologies and the potential risk impact due to retirements.

Information Technology

1. Budget Integration As a Constraint for Supply Chain Planning. While tight budget integration in the supply chain sounds like a good idea, it cuts the life out the supply chain. The reason? The budget only represents a point in time. As markets shift, if the supply chain is constrained to budget assumptions without updating the budget based on market shifts (which is impossible in a large organization), the supply chain struggles to deliver reliable supply. As a result, the budget should be an input into planning, but not managed as a constraint.
2. Tight Integration of Planning Into Enterprise Architectures. Today’s focus is on trying to make imperfect data perfect. As a result, supply chain planning serves no one well. Shift the focus from the use of planning technologies as a system of record, to build a collaborative planning environment to allow cross-functional teams to collaborate on the impacts of what-if analysis. Accept that planning will never be perfect in the spirit of Eisenhower, "In preparing for battle I have always found that plans are useless, but planning is indispensable." If your planning systems are tightly integrated into ERP and back office systems not allowing planners to perform what-if analysis, you run the risk of planners forced to use spreadsheet analysis and build maverick processes. The issue is simple. No spreadsheet jockey can adequately model the complexity of supply and demand variability in a spreadsheet. As a result, in the first phase of the pandemic, due to the tight integration, over 90% of decisions were made based on spreadsheets. The action item is to redefine planning. Only 28% of companies invested in the capabilities to analyze planning outputs based on collaborative workflow using “what-if analysis.”
3. Private Equity Investments in Supply Chain Software. Increasingly, private equity investments in software from PE firms like Blackstone Group BX, Insight Partners, and Thoma Bravo are milking cash from customer contracts, saddling technology companies with debt, while slowing R&D investment, and slashing workforces. For strategic IT investments get involved at a board level to protect these assets. Never believe press release claims that accompany these acquisitions.
4. Chasing Shiny Objects. Today, 48% of companies are focused on digital transformation, but supply chain teams are unclear what this means. Unfortunately, the focus is on technology acquisition not on building capabilities. For example, SAP touts digital transformation an integrated cloud-ready portfolio that includes predictive analytics, automation, and Internet of Things (IoT) capabilities. The issue? There is no clarity on how these advancements in technology improve capabilities. In the process of software evolution, SAP teams, like other functional and well-intended teams, become self-serving. Don’t investment to chase shiny objects. Instead, focus on defining core capabilities. In the process, make sure there is clarity on process redefinition. Doing the same old process, but only faster could be the greatest risk of all.

Conclusion

In the review of supply chain strategy documents by manufacturers and thought leadership content by consultants this quarter, I find these risk management elements missing and concerning. I hope that this article helps you and your company to think more holistic and be more resilient in 2023. Buckle your seatbelt, I expect turbulent times ahead.

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